LL Flooring Holdings, Inc.

Hello, everyone. Welcome to the LL Flooring First Quarter 2022 Results Call. My name is Charlie, and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star, followed by one on your telephone keypad. And I'll hand over to your host, Julie McMaden, Vice President of Investor Relations, to begin. Julie, please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for joining us. Today, I am joined by Charles Tyson, our President and Chief Executive Officer, and Nancy Walsh, our Chief Financial Officer. As we begin, let me reference the safe harbor provisions of the U.S. securities laws for forward-looking statements. This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of LL Flooring. Although LL Flooring believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in LL Flooring's filings with the SEC. During today's conference call, management will be discussing results on an adjusted basis. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in today's earnings release. The information contained in this call is accurate only as of the date discussed. Investors should not assume that the statements will remain operative after today. and LO Flooring undertakes no obligation to update any information discussed in this call. Now, I am pleased to introduce President and CEO, Charles Tyson. Charles.

Thank you, Julie. Good morning, everyone. On today's call, I will cover our first quarter performance, review progress on our six core growth strategies, fueling our three-year growth goal and our outlook for 2022. First, I would like to start by thanking all of our associates for their ongoing hard work serving our customers, improving our inventory levels, and opening new stores as we continue to navigate a volatile macroeconomic environment. During the first quarter, our teams continued to execute as we gained traction on our six core growth strategies, supporting our goal to deliver $1.5 billion of net sales with expanded operating margins by 2024. We were particularly pleased to deliver record double-digit sales to pro customers and to have opened seven new stores. Our first quarter financial results were in line with our expectations. Even though comparable store sales were down 3.6%, we achieved sequential improvement from down 6.7% last quarter. and we delivered a 3.3% increase on a two-year stack basis. We faced macroeconomic headwinds from inflation and a shift in consumer spending to travel and leisure this year, compared to stimulus and nesting spending in the first quarter of 2021. Also, in January, we experienced significant store closures related to the COVID-19 variant, including three Sundays when all our stores were closed nationwide. Thanks to the efforts of our supply chain and sourcing teams, during the first quarter, we increased total inventories by $64 million compared to December 31st, 2021. While much of that remained in transit throughout the quarter, it will benefit us going forward. First quarter adjusted operating income of $4.8 million or 1.7% of net sales, was also in line with our expectations and reflects continued supply chain cost pressures on gross margin, as well as the investments we're making to support our three-year growth. Our balance sheet is strong, and we have total liquidity of $231 million. In April, we commenced our share repurchase program, and through April 29th, we've repurchased $1.5 million under that program, underscoring our confidence in our long-term growth and profitability. Turning now to progress on our six core growth strategies that will position LL Flooring for long-term success. Our goal is to transform LL Flooring into the leading destination for hard surface flooring. We strongly believe we offer a compelling value proposition to customers with selection, expertise, and service of a local store combined with the scale, convenience, and value of a national chain. Now I want to share more details about the six core growth strategies we're investing in that will position us to achieve our long-term vision. Accelerating new store openings, growing sales to pros, broadening awareness of the LL Flooring brand, improving the customer experience to deliver on the brand promise, innovating new products, and driving our people and culture initiatives. First, accelerate new store openings. Opening new stores is an important strategy that will help us both increase convenience and build awareness of the LL Flooring brand. We're on track to open 20 to 25 new stores in 2022, all in our standard format, which is a 1,500 square foot showroom an attached 5,000 to 6,000 square foot warehouse with deep in-stock inventory readily available for our customers. During the first quarter, consistent with our plan, we successfully opened seven new stores across the South, Northeast, and Midwest. Second, grow sales to pro customers. Sales to pro customers are a key component of our long-term growth strategy, and we see a large opportunity ahead. During the first quarter, we posted another record quarter of pro sales with double digit growth versus the first quarter of 2021. Our pro relationship program continues to drive greater pro customer retention and higher sales per pro customer. Our strategy is to build and strengthen relationships with pros through a team comprised of local store talent and dedicated outside pro account reps in the major markets we serve. as well as our inside sales team. Pros really appreciate the dedicated expert service that our team provides and view us as a trusted resource that makes their jobs easier. Through this program, which we call TSR, for drive trial, build scale, and earn retention, we're successfully increasing the number of scale pros who spend more with us annually, and we are retaining more of them. The TSR program is a key driver to our record growth in sales to pros, and we continue to make investments in this team. Pros also value our dedicated everyday pro pricing and our pro website that makes it easier for them to do business with us. And they value our in-stock selection of turn-right floors in their local store. Our store managers assist in customizing the local assortment to stock the floors our pros request. Once the pro places their order, we provide the additional service of storing materials at no charge until the pro is ready to complete their purchase. We also do not charge customers restocking fees. We continue to build awareness with pros. We've developed a pro digital marketing strategy that allows us to deliver personalized messaging based on the pro's behaviors and where they are in their journey with us. We're able to tailor messages by segment, by market, or by pro, delivering value to the pro by communicating with them based on their needs. We look forward to growing our sales with pros through continued execution of our TSR relationship program, everyday low pricing, website assortment, and personalized marketing strategies. Moving to our third strategic growth driver, broaden awareness of the LL Flooring brand. We continue to progress on our long-term journey to build brand awareness and equity and establish LL Flooring as the leading destination for hard surface flooring. Our research shows increased customer perception of style, quality, and category leadership for the LL Flooring brand versus lumber liquidators. And we are excited about the new LL Flooring brand as a catalyst for growth. One way we're building awareness of our new brand is through the store rebranding and new store openings. Our rebranded showrooms highlight the quality and variety of our assortment as well as support a more curated and guided shopping experience for our customers with signage featuring lifestyle photographs so customers can envision our flooring in their homes and QR codes that customers can click through to our website to learn more about our products. We continue to evolve our marketing strategies and capabilities to increase relevance with our customers. That evolution includes a more targeted approach in our creative and segmentation, leveraging new content that is tailor-made for specific media channels and delivers more impactful messages to audiences at different stages of their journey. The fourth strategic growth driver is improving the customer experience to deliver on the brand promise. Shopping for flooring is a big purchase that requires careful consideration. Our goal is to position LL Flooring as the go-to expert in flooring through a comprehensive omni-channel experience spanning our website, customer contact center, stores, and for installation customers in the home. There are three key elements of our customer experience strategy, the digital omni-channel experience, the in-store experience, and the installation experience. Starting with the digital omnichannel experience, we are continuously improving our llflooring.com digital experience for customers. Integral to our digital strategy is providing online tools like Pitcherit, as well as inspirational and educational content to guide customers on their journey to select the perfect floor. We're also proud to help customers shop for floors from the comfort of their own home. We are one of the only retailers that offers flooring samples completely free without even a delivery charge. Another important component of guiding our customers through the flooring journey digitally is our customer contact center. We've expanded the number of sales agents with flooring expertise in our contact center. These agents guide customers throughout the flooring journey and help drive sales conversions. In summary, we provide multiple personal touchpoints, including virtual guidance to better educate customers so they are ready to make this important purchase decision for their homes. While a majority of customers start the flooring journey online, most complete their purchase in one of our 431 stores across the country. Our stores offer a welcoming environment where customers are immediately greeted by one of our personal flooring experts who can help them select the floors they love. We believe a key competitive advantage is the high-touch service and expertise we provide in our stores, and we continue to invest in our associates with competitive wages and benefits, extensive training programs, and numerous career opportunities. During the first quarter, we launched a new training program for associates called GREAT, which stands for Greet, Relate, Explore, and Excite. Ask and answer and tailor next steps. Through the GREAT sales methodology, our associates will further develop their consultative sales skills necessary to become a trusted advisor to our customers. We're really excited to roll out this program across our sales organizations. to reinforce our leadership position in providing expert service to our customers. Because the customer experience is so important to us, we have developed a customer feedback mechanism that provides us with daily customer feedback to help us improve our customer experience journey. Next, the installation experience. We're pleased to offer an end-to-end solution to our customers from inspiration to installation. During the first quarter, net service sales comprised of installation and delivery services increased 4.1 percent. We got off to a slow start in January due to the impact of COVID-19, but we were able to complete more installation projects as the quarter progressed. We continue to focus on providing a superior installation experience by using technology and training to make the installation process as seamless, fast, and easy as possible. for customers, associates, and contractors alike. The fifth growth strategy is innovating new products and delivering them at a compelling value for our customers. Our merchant and sourcing teams are proactively identifying trends and driving innovation to create exclusive product offerings and then partnering with the best sourcing providers around the globe to deliver our vision. We believe a key competitive advantage for us is our direct sourcing model. We partner with more than 85 manufacturers across 22 countries to deliver on-trend private label products. Our direct sourcing strategy drives better innovation, lower costs, and heightened agility in adapting to global supply disruptions due to COVID or other factors. We have continued to reduce our sourcing from China as we broaden our supplier base from other parts of the globe. In the first quarter, we sourced only 16% of product from China, down from 23% at the end of 2021, and down from 48% at the end of 2018, the year that tariffs were first imposed. By going factory direct, we're able to achieve cost efficiencies that we pass on to our customers. For pros, we offer everyday low prices, and for homeowners, we offer great value with the opportunity to capitalize on special promotions throughout the year. We also offer our best price guarantee for customers. Within our assortment of 500-plus choices, we uniquely stock each store based on local demand, which gives us the best opportunity to meet customers' needs at the local level. For example, in our Connecticut market, just under 50% of sales in 2021 were Hogwarts, such as our best-selling Bellawood brands. While in Tampa, Florida, roughly 80% of sales were manufactured and performance flooring, including our new Duravana brand. And because we have a warehouse attached to our showrooms, our stores can easily stock what our pro customers and homeowners want, giving us an advantage over smaller independent retailers. In short, we believe we have a strong competitive advantage with our direct sorting, merchandising, assortment and stocking strategies that enables us to deliver quality on-trend hard surface flooring in a custom assortment for customers in each local market. Now I'd like to speak about our sixth strategy, driving our people and culture initiatives. Our people are critical to achieving our goal to become the customer's first choice in hard surface flooring. In today's competitive market for talent, we feel good about our positioning as an employer of choice. We're building a culture that differentiates us and not only makes us an attractive place to work and build a career, but also drives our success. We believe engaged associates aligned with our values are critical to meeting our strategic growth objectives and delivering outstanding service to our customers. During the first quarter, we completed our second annual employee cultural survey. We're pleased to report that we experience greater levels of participation with strong results and improvement year over year, reflecting both our commitment to our associates as well as their increased engagement and enthusiasm as LL flooring employees. We continue to emphasize internal promotions and career popping, extensive training, and a culture that embraces diversity, equity, and inclusion to strengthen our position as an employer of choice as we look to attract and retain top talent. In summary, we're excited about our six strategic growth drivers, accelerating new store openings, growing sales to pros, broadening awareness of the LL Flooring brand, improving the customer experience to deliver the on-brand promise, innovating new products, and driving our people and culture initiatives. We'll position us for accelerated top line and profitability growth over the next three years. Turning now to our 2022 outlook. On our last conference call, we shared our outlook for 2022 to be a tale of two halves, with a challenging first half turning to growth in the second half and positive growth for the full year. While we see more volatility in the macroeconomic environment at this time, our 2022 outlook remains unchanged. That said, we continue to monitor global and domestic inflation and the impact from rising interest rates on discretionary consumer spending, as well as the impact from supply chain disruptions due to COVID-19 shutdowns in China. Inflation hit 40-year highs in February and March and has been further exacerbated by the conflict in Ukraine. We have also seen a shift in spending to travel and leisure after two years of pent-up demand. Housing factors are mixed. While existing and new home sales have slowed due to availability and affordability, we feel good about the remodel business based on the increase in home equity value and homeowners' desire to improve their homes as they adapt their lifestyles to a hybrid work environment. With respect to the supply chain, we're monitoring the impact of COVID-related shutdowns in China on our ability to secure inventory from that region. as well as increased material costs in Europe and our ability to mitigate these higher costs through continued pricing, promotion, and sourcing strategies. As previously stated, we've reduced our sourcing from China to just 16%. While we continue to monitor the economic trends impacting our business, based on what we know today, we still expect to deliver positive same-store sales growth in 2022. A key reason for our confidence is that we remain on track to return inventories in our stores and distribution centers to optimal levels by the end of the second quarter. And as we have demonstrated over the past two years, we can be agile and navigate a challenging macro environment while remaining laser focused on delivering our value proposition to our customers. Our balance sheet and liquidity are strong, and we're well positioned to achieve our outlook for 2022, as well as our growth objectives over the next three years. As a reminder, our goal is to achieve net revenue of $1.5 billion by 2024, representing a 9% CAGR from 21 to 24, combined with expanded operating margins. We're excited about the growth opportunities ahead and our ability to business LL Flooring as the leading destination for hard surface flooring. In closing, in the first quarter, we gained traction on our six core growth strategies, including delivering record pro sales and opening seven new stores, and were on course to deliver our goal to achieve $1.5 billion in net sales with expanded operating margins by 2024. Our first quarter financial results were in line with the expectations we communicated on our year-end calls. We are successfully rebuilding inventories to optimal levels by the end of second quarter, supporting our future growth. Our balance sheet is strong with no debt and strong liquidity positioning us well to achieve our outlook for 2022 and to execute our vision to position LL Flooring as the leading destination for hard surface flooring. I look forward to reporting on our progress next quarter. I will now turn the call over to Nancy. to share our financial details and outlook. Nancy?